Problem
Consider the relationship between PCE and PDI discussed in the text.
(a) Regress PCE on an intercept and trend and obtain the residuals from this regression. Call it S1.
(b) Regress PDI on an intercept and trend and obtain residuals from this regression. Call it S2.
(c) Now regress S1 on s2. What does this regression connote?
(d) Obtain the residuals from the regression in (c) and test whether the residuals are stationary. If they are, what does that say about the long-term relation-ship between PCE and PDI?
(e) How does this exercise differ from the one we discussed in this chapter?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.